Congratulations, you’ve just landed a great new job with a small tech company here in Toronto. You think their new SaaS or IOT product is going to change the world. It certainly will change yours. You know the world of startups is exciting and interesting and that is what attracted you to apply for the job in the first place. You also know that not all of them survive, but you are happy to take that risk for the potential of a great payoff when they survive and thrive. Often this payoff comes in the form of Employee Stock Options.
What exactly is an Employee Stock Option (ESO)? Simply put, it’s when your employer grants you a choice to purchase shares of the company at a specific price for a certain period of time. In the world of startups, they often form a huge portion of an employee’s comp. This is the “great payoff” mentioned above. Stock options can end up being a significant windfall for long time employees of successful startups.
Employee Stock Options do create some tax headaches for you and I won’t get into too much detail here because, well, I don’t want to bore you to death. To keep it entertaining, make sure you know the following if you are a member of an ESP.
- Is your company a private company and controlled by Canadians? [Hint: If it has “Can“ in the name or your office smells of Beavertails, then it’s likely a Canadian Controlled Private Corp (CCPC)]
- What is the vesting period of the ESP? Vesting period is the fancy way of saying “How long you must wait until you can exercise the option”.
Here is why I believe those are the two pieces that matter when you get your first ESO invite. In Canada, we tax Employee Stock Options in two different ways and receiving them from a CCPC is the more advantageous option for you. Most of the startups you find in Canada will qualify as CCPCs but just make sure you know this from the start so you can prepare for the tax payment coming later.
The vesting period is next in importance because this matters more to your job and career. Standard ESO plans will have a vesting period of 2 years or longer. Remember that vesting period applies to each year (AKA: vintage) of Employee Stock Options granted to you. If you were granted 1000 options in 2017 and another 1200 in 2018, they will become vested in different years. This is important to know for that instance when the industry recruiter comes calling with a better job at the startup across the street. If you want to take the new job, your stock options that have not reached the vested date are typically lost to you and that could be a significant asset hit that you did not prepare to lose.
Employee Stock Options are a fantastic method to reward employees who contribute to the growth of the business. For an employee working in the booming startup industry in Canada, they can be a fantastic reward for years of hard work but they also require careful planning at the beginning to plan for the payoff you are expecting in the future. When the CEO comes to you with the options news, ask if they qualify as stock options from a CCPC and what the waiting period to exercise the options will be in this vintage. The answer could save you thousands of dollars in the end.
If you have questions about your own ESO and want to ensure your plan is tax-efficient, contact me here.